Tax code

US tax code may make things even harder for black Americans

The code was designed with the intention of being largely progressive, meaning the less you earn, the less you are taxed. In other words, those who have the ability to pay more should be taxed more.

At the same time, it also rewards certain economic and heritage activities, such as home ownership, retirement savings and investment. But he is White Americans who disproportionately benefit from tax breaks for these things, Emory University tax law professor Dorothy Brown told lawmakers on the Senate Finance Committee this week.

And even when black Americans engage in these same activities, they often don’t get the tax benefits, said Brown, who is also the author of The Whiteness of Wealth: How the Tax System Appoverishes Black Americans — and How We Can Fix This.

That’s why she thinks the US tax code helps perpetuate the racial wealth gap, in which the typical white family owns eight times the wealth of the typical black family, according to a 2019 Federal Reserve. analysis.

Here are some of the ways she suggests it happens.

Subsidize home ownership

Take just one of the tax benefits associated with home ownership. When people sell their homes, any appreciation in the value of their home is tax exempt up to $250,000 ($500,000 for married couples).

It’s a tax break that was created in the 1950s, when discriminatory lending practices made it very difficult for black Americans to get a mortgage, while white Americans got low-cost, low-interest home loans. fixed and federally insured, Brown noted.

Moreover, she says, to research shows that the greatest home appreciation occurs in predominantly white neighborhoods and that black homeowners are more likely to sell their homes at a loss. A new study released this week found that homes in black neighborhoods are undervalued by an average of $46,000.

And, as Brown pointed out, the tax code does not allow taxpayers to deduct capital losses on a home.

“Tax subsidies for home ownership therefore create white tax winners and black tax losers,” Brown told lawmakers. “The federal government should stop subsidizing a racist home ownership market.”

Tax breaks for savings, investments and inheritance

Another area of ​​wealth creation benefiting from tax subsidies is retirement savings and workplace investing.
White Americans are more likely than black Americans to work for an employer that offers a tax-advantaged retirement plan, such as a 401(k). Generally, a worker’s contribution is tax-deductible and grows tax-deferred, along with the employer’s match until the money is withdrawn in retirement.
If money is withdrawn before age 59.5, it is subject to income tax and a 10% early withdrawal penalty. And, noted Brown, research suggests that black workers are more likely than other racial and ethnic groups to retire early. So they end up paying more tax on their savings and end up with less savings in retirement.

When it comes to investing in stocks outside of a pension plan, the capital gains tax rate on investments held for more than one year is generally lower than the tax rate applied to income. work. And investors can use their capital losses to offset their gains.

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Additionally, wealthy investors can afford to time their stock sales to gain maximum tax benefits, Brown noted. Or they can choose not to sell their shares at all, but instead leave them to their heirs, in which case any gains accrued during the investor’s lifetime pass tax-free to those heirs.

Polls show that black Americans are less likely invest in the stock market than white Americans. And since taxes are regularly withheld from their paychecks, they don’t have the advantage of choosing when and how much to pay tax on that income in the same way that investors can time their tax bite on investments. in stocks, Brown noted.
And black Americans generally don’t inherit as much like white Americans do when their parents die, not to mention to have tax-free gains on long-held investments.

Impact assessment

Brown recommended to lawmakers that changes be made to the tax code to address these inequities.

“Our tax laws need a fundamental overhaul that puts racial equity at the center,” she said.

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But Mihir Desai, a finance and law professor at Harvard who spoke at the same hearing, warned lawmakers that concluding that the tax system disadvantages a racial group based on one set of provisions could be an incomplete assessment, in part because it underestimates other code provisions that disproportionately advantage that same group. For example, refundable credits for low-income households, among which minority groups are disproportionately represented.

“It is essential to consider the entire tax system if one wants to assess the racial impacts of the system,” Desai said. “It would be unwise to extrapolate from an analysis of savings preferences to the entire tax system.”

Brown argues that to fully assess the extent of racial inequities in the tax system, the IRS should begin reporting tax return data based on race, which it currently does not.

And, she recommended, “every future Congressional tax reform proposal should be accompanied by a racial impact statement.”